The franchisor compliance manual

Things to consider

When considering whether your conduct is in good faith, potential questions to ask include:

  • Have you been honest with the other party?
  • Have you considered the other party’s interests?
  • Have you made timely decisions?
  • Have you consulted with the other party regarding proposed changes?
  • Are you imposing any conditions on the other party that aren’t necessary to protect your interests?
  • Where a dispute has arisen, have you attempted to resolve the dispute (either directly with the other party, or through mediation)?
  • Are you acting for some ulterior purpose?

Example: The franchisor of a video rental franchise system granted a franchisee an exclusive licence over a particular territory. This meant that the franchisor was not allowed to be involved in the rental and/or sale of video products, or a business of a similar nature, within the franchisee’s territory.

During the agreement, a business that was related to the franchisor sold DVDs via its website to consumers who lived in the franchisee’s territory. The franchisor did not take any action to prevent these online sales.

By allowing its related business to sell DVDs within the franchisee’s territory, the franchisor has not acted in good faith as it failed to remain loyal to the promise of the franchise agreement.

Example: The franchisor of a motor vehicle service franchise system entered into a franchise agreement that required the franchisee to follow specific procedures for invoicing and reporting.

During the agreement, the franchisee experienced difficulty in accurately processing invoices using software and hardware supplied by the franchisor. Meetings with the franchisor failed to resolve these issues, leading to a breakdown in the franchising relationship.

The franchisor subsequently issued a number of default notices to the franchisee, alleging that the franchisee had not complied with its invoicing and reporting requirements. However, the franchisor did not have a solid basis for the alleged breaches as it was unclear whether the franchisee had failed to follow these requirements. The franchisor’s default notices were motivated by its desire to eventually terminate the franchise agreement.

The franchisor later terminated the agreement on the basis that the franchisee had failed to remedy the alleged breaches.

In this instance, the franchisor has not acted in good faith because it was acting for an ulterior purpose.